US and European futures are trading lower today, following a retracement in US indices. The Dow Jones Industrial Average fell nearly 290 points, wiping out gains made on Monday. This is despite the fact that we had a much softer reading for the US Consumer Price Index. It showed a lower-than-expected rise in commodity prices in August. Basically, traders are still worried that the Fed is still likely to start the tapering this year despite the slow inflation reading and a weak set of US NFP data. It is still possible that next week we may get some timeline from the Fed in relation to their tapering of the loose monetary policy.
In yesterday’s session, the Dow Jones Industrial Average slumped 0.84%, and the S & P 500 index dropped 0.57%. The Nasdaq, the tech-savvy index, declined 0.45%, and the Russell 2000, the small-cap index, fell 1.37%.
The data released yesterday suggested that inflation may finally be slowing, giving some legitimacy to the Fed’s chant that inflation is transitory and will eventually subside as supply chain bottlenecks are addressed. The consumer price index, which measures the price movement of certain commodities and energy products, grew 5.3% on a year over year basis, relative to the expected 5.4%, and 0.3%, relative to the expected 0.4%, on a month over month basis. In July, prices had jumped 0.5% compared to a month earlier.
Investors should note that the 5.3% annual surge in consumer prices is still the highest in nearly 13 years. The major contributor to the uptick was rising energy prices. The cost of energy has risen by 25% and that of gasoline has surged 2.8%, while food prices saw only a 0.4% incline. Core inflation, which excludes energy and food prices, rose at the slowest rate since February. The growth in used vehicle prices, which has risen 31.9% year on year, is the driving force behind core inflation.
According to the Federal Reserve, rising inflation is likely to be short-term and is adversely influenced by shortages of important inputs such as semiconductors and enhanced demand as a result of economic reopening.
Speculators are already projecting that the central bank may start winding down its stimulus before the end of 2021. However, lower than projected inflation numbers will likely provide some flexibility to the Fed to sustain its dovish stance until some improvement can be seen in the labour market as well.
Stock traders should remember that the Empire State Manufacturing Index and the Industrial Production data are set to be released today. This data would provide investors with insights into how businesses are seeing the economy turning out in the short term as they respond swiftly to changing business cycles and economic conditions.
Tropical Storm Nicholas is expected to stymie US oil production at a time when oil suppliers are still reeling from the effects of Hurricane Ida. As a result, oil prices have moved up. However, the U.S. government has decided to supply oil to eight companies such as Exxon Mobil, Valero, and Chevron from the country’s emergency reserves. Furthermore, Beijing’s release of oil supplies from its strategic petroleum reserves is also likely to appease supply-side pressures.
Traders should dissect today’s crude oil supplies data to better understand how the gap between demand and supply is acting out.
Gold prices have reached a weekly high as a result of lower-than-expected inflation numbers. As a result, the dollar index slipped to 92.601 as the timing of the reduction in bond purchases remains uncertain. Investors should be aware that the next step after tapering is an increase in interest rates. A rise in interest rates would boost the opportunity cost of holding the precious metal, supporting a spike in the dollar index. On the other hand, lower inflation figures are likely to postpone the inevitable tapering announcement, sending gold prices higher.
Moving forward, traders should closely monitor economic statistics to see how the economy is performing and how the Fed may react in the coming months.
The schism between Beijing and Western countries is likely to have an impact on financial markets as well. Zheng Zeguang, the Chinese ambassador in London, was recently barred from attending a parliamentary meeting after his invitation caused unrest among British politicians who China sanctioned.
Furthermore, President Joe Biden and Xi Jinping, President of the People’s Republic of China, discussed a face-to-face meeting during their conversation, but the Chinese president turned down the idea because he is avoiding leaving his country during the coronavirus pandemic. However, regulators from Beijing and Wall Street are expected to hold a virtual meeting on Thursday to discuss regulatory crackdowns in China as well as relations between Washington and Beijing.
As per the latest economic data released, the Chinese economy showed weakness in August because of the imposition of tighter controls by the government to contain the surge in coronavirus cases. Because of this, travel and consumer spending took a beating during summer vacations. Retail sales dropped to 2.5% on an annual basis, compared to the expected 7%, while industrial output increased by 5.3%, compared to the projected 5.8%.
As of 10:54 p.m. EST, the Nikkei declined 0.52%, while the Shanghai Composite Index fell 0.09%. The ASX 200 index dropped 0.50%, and Seoul’s Kospi rose 0.29%. The Hang Seng index, in Hong Kong, slumped 0.53%.